India widens inquiry into public debt issue subscriptions, sources say

JM Financial

08/03/2024 13:19

By Jayshree  P Upadhyay and Dharamraj Dhutia
       MUMBAI, March 8 (Reuters) - India's financial market
regulator and its central bank are widening an investigation
into how merchant banks manage retail subscriptions in public
debt issues, two sources with direct knowledge of the matter
told Reuters.
    The Securities and Exchange Board of India (SEBI) barred JM
Financial from taking new mandates this week, saying it had
found that funds from connected entities were used to inflate
subscriptions and provide an assured exit to investors.
    JM Financial said in a stock exchange filing on Thursday
that it will fully cooperate with SEBI in its investigations. 
    The Reserve Bank of India (RBI), meanwhile, has told JM
Financial's non-banking unit to stop any form of financing
against shares and debentures, including loans to customers to
subscribe to initial public offerings (IPOs).
    Several other cases are under investigation to see if
merchant banks provided investors with an exit through connected
non-banking finance firms, said the two sources, who declined to
be named as they are not authorised to speak to the media.
    Investigators are also studying if disproportionate loans
were given to subscribes and whether customer identification
processes were not adequately followed, the sources added.
    SEBI and RBI did not respond to requests for comment. 
    Indian regulations do not bar investors from taking on
credit to subscribe to debt securities in public issues.
    However, assuring investors of a profitable exit would break
the code of conduct for merchant banks which bars them from
creating an artificial market.
    
    MARKET IMPACT 
    Indian companies have raised more than 200 billion rupees
($2.4 billion) via public issues of bonds so far this financial
year, more than double last year, data from Prime Database
showed. This is also the highest in last five years.
    Five merchant bankers told Reuters that the regulatory
scrutiny of processes followed in the public debt market could
cut subscriptions for such issues and raise the cost of funds.
    "This will now lead to a slowdown in retail subscriptions,
as an artificial demand for the product was created, which
actually did not exist," said one banker, declining to be
identified as they are not authorised to speak to the media.
    Non-bank lenders, which are looking to diversify their
source of funds after the central bank raised capital
requirements for banks to lend to them, may be hardest hit.
    Bank lending to NBFCs has slowed in the past few months and
SEBI's investigation could push them back to fundraising through
private debt placements, said Vinay Pai, head of fixed income at
Equirus.
($1 = 82.7070 Indian rupees) 

 (Reporting by Jayshree P Upadhyay and Dharamraj Dhutia;
Additional reporting by Bhakti Tambe; Editing by Ira Dugal and
Alexander Smith)
 ((Dharamraj.Dhutia@thomsonreuters.com;))